A lump sum settlement means the compensation you receive for your injuries will be paid in one large payment for the full amount negotiated. So for instance if you are entitled to $500,000 in compensation, you will receive the entire $500,000 at once. This can have advantages and disadvantages based on many different factors.
Pay Off Everything – For injury cases where you have a lot of debt or bills due right away that were a result of your injuries, a lump sum payout can help you pay off all of those debts immediately so you can be free and clear of those debts and stop worrying about them.
Pay Off Other Bills – If your settlement is larger than the payoff for your injury and medical bills, you are free to use the settlement funds to pay off any other debt you may currently have such as an auto loan or a mortgage. This can help you save money on interest as well as decrease your monthly bills which gives you more opportunity to invest or start your own business if that’s what interests you. You may also come upon unexpected bills such as home repairs or other legal issues that need to be covered and having this extra lump sum funding may help you cover those costs when they arise.
Invest It – The last advantage is that you can invest the extra part of your settlement and turn it into more in the long run. This can be from starting a business, getting into the stock markets or anything else you may want to do to establish a second source of income or retirement funds. It is important to note that your original settlement is 100% tax free according to the law, so you don’t have to worry about taxes; however you will be required to pay tax on any extra profits you make from investing that settlement money.
Unexpected Expenses – If you go out and spend all of the settlement money quickly and then find out you need extra medical care from the accident, then you won’t have any spare funds from the settlement to pay for these and will be forced to cover those costs out of your own pocket. We all know how expensive medical bills can get, so this is something to be fully aware of when deciding how to spend your compensation package.
Poor Outcomes From Investments – Not every investment will do well and this can end up diminishing your settlement payout if it happens to you. Sometimes markets go down or that business you started might not become successful and now those extra funds you had are gone or severely diluted. There won’t be another settlement check coming in the mail, so it is extremely important to make very wise and safe bets with that money if you do decide to invest it in something.
Structured settlement payments are where your compensation package is distributed to you over a specific period of time and at a certain interval. This typically means monthly, quarterly or yearly payments of a certain amount over a set period of time, such as 10 years. Every injury settlement is different and will come with varying terms, but typically structured settlements are used when the injured party is going to have ongoing medical expenses or has lost income due to the injuries.
That income loss or ongoing medical expenses require funds to be paid on a consistent basis and due to that, structured settlements are a much easier way for the injured to ensure they have the money required at the time those expenses come up. Monthly payments are one of the most common options people choose as it is the easiest to manage financially. Here are some of the main advantages and disadvantages of structured settlements:
Regular Income – Having a regular payment come in can relieve a lot of stress, especially if you have ongoing medical payments to cover. Knowing you have a check coming in to cover costs from your injuries helps you plan your spending accordingly and ensure no bills go unpaid that are related to your accident. In the event you are able to pay off those debts early or treatment ceases before expected, then you now have an extra source of regular income to do with as you please.
Easier To Budget – Let’s face it, not all of us are good at budgeting our money, especially when we have a large amount of free capital to spend. When you get a structured settlement, those budgeting worries are a lot easier to handle. Set aside the amount required to cover your expected costs and spend the rest on whatever you’d like. We do however recommend setting any extra funds aside for unexpected costs as you never know when those can come in.
Protection From Bad Investments – If you go out and make a bad investment in the process of trying to increase your portfolio using settlement funds, you may have blown the first check, but there will still be more to come in the future so you have a little more financial protection in that sense. Just make sure you don’t make the same mistake with every settlement check that comes in down the line and always make sure your injury expenses are fully covered before making any investments.
Can’t Cover Unexpected Bills – If any unexpected bills come up, you won’t be able to ask for more this month from your settlement to cover those costs. These settlements are legally binding documents that will not be changed due to your urgent need for more money. This leaves you at a slight disadvantage since a lump sum would have helped get you out of that type of situation if it arises.
Those bills need to be paid off with a lump sum payment and will also have recurring bills due for ongoing medical treatment or lost income. The lump sum covers the bills due right away and the structured payments cover any ongoing costs so that the settlement helps them budget everything correctly and still be made whole in the end, without worrying about accruing interest on the bills that are due now. If this is how your case looks, be sure to discuss this option with your injury attorney.
Generally, the government does not charge tax on any settlement funds you receive because it is not considered income. However, it is important to note that this exemption does not continue over to profits made using the extra funds from your settlement, and does not apply to all settlements depending upon what the controversy was about. So let’s say you go out and put your settlement funds into the stock market and cash out on a big rally with a 50% profit. The profit made on those gains is still taxed as normal capital gains so make sure you keep that in mind.
